Hello, welcome to this blog on Terms of Trade in economics and commerce, Reasons and methods of improving terms of trade.
Table Of Contents
- Definition of terms of trade
- Terms of trading In West Africa
- Reasons for the worsening terms of trade
- Methods of improving terms of trade
Definition of Terms of Trade
Definition: Terms of trade may be defined as the rate at which a country’s exports exchange for its imports. It is expressed as a relationship between the prices a country receives for it exports and the prices it pays for imports. In other words, terms of trade is the price ratio between export and imports. Terms of trade is usually measured by the Mathematics formula Bello:
Terms of trade = index of export price × 100 /
index of import price × 1
A country’s time of trade are said to be improve when this ratio increases and to worsen when it decreases. The terms of trades are favorable if the average price of exports is higher than the average price of imports. Export become relatively more expensive than imports. The index of terms of trade would therefore be more than 100. If the prices of exports rise in relation to the prices of imports, the terms of trade will improve, since a given quantity of exports will pay for more imports. Favorable terms of trade leads to a rise in the real national income.
The terms of trade are unfavorable if the average import price is higher than the average export price, which results in more expensive imports than the exports and this situation worsen terms of trade. When terms of trade are unfavorable, the index will be less than 100 and this reduces the real national income.
Terms of Trade in West Africa
Terms of trade in West Africa countries have been witnessing an unfavorable or worsening trend because the prices of their imports have been increasing relative to prices of exports.
Reasons for the worsening of Terms of Trade
- Most west African countries are producers and exporters of primary products, e.g, agricultural produce and crude minerals.
- They import lots of capital goods in an effort to industrialize thereby increasing imports more than exports.
- There has been a fall in the demand for certain primary products of west African countries. This is due to the development of substitutes by the developed Nations. This leads to a decrease in the price of export and increase in the prices of imports.
- The production of low quality of manufactured products is also a problem. This is due to low level of technological development. The importation of high quality manufactured products, therefore increases importation over exportation.
Methods of Improving Terms of Trade
The terms of trade can be improved by any method which wIll increase the prices of exports relative to imports. This methods include:
- Use of inflationary policy
- Appreciation of the currency
- Imposition of higher export duties on commodities with an inelastic demand.
- A reduction in the demand for imports.
- Through collective bargaining, developing countries could achieve higher prices for their exports.
- Improvement and the quality of manufactured goods.
- There should be increased internal use of primary products in production.
Revision Questions
- Define terms of trade
- State the Terms of trade ratio
- What are the reasons for the worsening terms of trade?
- List the methods of improving terms of trade in economics